6 Ways To Protect Your 401(K) During a Recession

For many months, there has been speculation about a potential recession in the United States.

Nobody knows if a downturn is coming , but it might be best to prepare yourself financially in case one occurs.

Consider these things as you try to protect your 401(k) during tough economic times. As always, you should consult with an investment advisor who can help you plan for your own situation.

Find Out: 8 must-do things before 60 for a stress-free retirement

1. Think twice before making big changes

This may be one of the most difficult pieces of advice to follow, especially if the stock market plunges and your portfolio declines. Still, during a recession, you might want to avoid making quick or big changes to your 401(k).

History shows that people who have seen their 401(k) balances plunge have also watched them recover later. Of course, that recovery might not happen as quickly as you would like.

If you are unsure about how to handle a downturn, talk to a financial advisor.

Do you owe the IRS over $10K? Ask this company to help you eliminate your late tax debt.

2. Consider the danger of trying to time the market

Most experts advise against trying to guess where the stock market is headed and making investment decisions based on such guesses.

This is known as trying to “time the market,” which rarely works out well.

3. Weigh whether to contribute through thick and thin

This one may take some discipline, but you might want to contribute to your 401(k) even when an economic downturn or recession is on the horizon.

While it may be tempting to pause contributions, many financial experts advise against this, as it's just another example of trying to time the market.

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4. Wait for the market to recover

If you decide to stay in the market, there is a good chance you'll suffer some short-term losses. If that happens, you'll have to wait patiently for your investments to recover.

Most investors who have waited for stocks to recover in the past have been rewarded. Of course, there is no guarantee that the future will be like the past.

5. Beware of the downside of a 401(k) loan

Any time you take out a 401(k) loan, you put your retirement at risk: The money that would otherwise grow in your 401(k) is now outside the account and no longer helping you get closer to retirement.

There are times when a 401(k) loan might make sense. But before taking the plunge, consider speaking with a financial advisor.

6. Pay close attention to how you react to market losses

A recession is never good, but it can have a silver lining.

For example, if your portfolio plunges, pay close attention to how you react. This can be a good lesson that teaches you about your risk tolerance level.

If you learn that you tend to become fearful during market losses, it might suggest that you need to dial back on the risk in your portfolio.

While you probably want to try to maximize your retirement savings , there's no sense in taking so much risk that you can’t sleep at night.

Bottom line

By thinking about ways to protect your 401(k) during a recession, you might be able to eliminate some money stress .

Just remember that nobody can control where the economy — or the stock market — is headed. If you are unsure how to weather a recession, speak with a financial planner or other professional.

Money tips that can work for everyone

No matter what your bank account balance is, there's always an opportunity to optimize and improve your finances. Here's a quick checklist of things you can look at today.

Focus on paying off your debt . Debt can hold you back from making progress with your overall financial well-being. Aside from cutting expenses, there are tools that can help you pay off debt faster like balance transfer credit cards and debt counseling.

Earning extra income can give you breathing room. If finances are tight, earning some extra money to supplement your income can make a huge difference. A new job is one option to consider, but if you're not ready to make a big change or already retired, a part-time side job could be a better choice.

Cut your expenses. It sounds painful and so not fun, but it doesn't have to be. Take a look at your biggest expenses because that's where you'll probably find the biggest savings. For example, auto insurance rates have been soaring so shopping around for a new insurance company can be the fastest way to cut your bill. Also, look for ways to cut your grocery bill (despite rising inflation).